How pricey rents sparked a new type of lender
You’ve seen the headlines time and time again — Millennials can’t afford to pay rent. As population density increases and housing prices rise, many young professionals and recent college graduates are being pushed out of the increasingly competitive market. Some up-and-coming companies, though, are offering to shoulder the financial burden. A new type of lender is on the rise.
The current market
Rental prices are higher now than ever before. According to Yardi Matrix, the 2019 median cost of rent in the United States is a whopping $1,430 – that’s a 3.2% increase from the previous year. Rent has become particularly expensive in major cities. Of the most populous 253 cities in the U.S., 92% experience annual rent hikes. The rate increase in growing cities like Phoenix and Las Vegas is particularly steep. Between March of 2018 and March of 2019, median rent prices in both cities spiked by 7.8%.
This rising cost of living is daunting for Millennials. For previous generations, securing housing was as simple as getting a job, applying for a rental, and signing a lease. For Millennials, though, securing housing is a much more challenging and arduous process. New college grads with first-time salaries and developing credit scores are up against unattainable requirements. In New York City, for instance, many landlords will only accept tenants with 700+ credit scores and an income that’s 40 times the monthly rent. College grads and fledgling professionals can’t hit that mark.
The nature of work is changing, too. A recent report from the U.S. Bureau of Labor Statistics revealed that 16.5 million Americans participate in the “gig economy” and 59% of U.S. companies employ remote and freelance workers. More and more Millennials participate in these unconventional work arrangements; it’s estimated that up to 50% of Millennials in the workforce are freelance, contract, or contingent workers. This paradigm shift means irregular, inconsistent paychecks for many of the nation’s young professionals.
Struggling Millennials aren’t getting much help from lenders. Though some credit unions and banks are adapting to the changing market, many continue to offer insignificant loans with sky-high interest rates (as high as 700%!). Young adults are in a tight spot: take out loans and incur thousands in surmounting debt, or settle for small, out-of-the-way, or otherwise undesirable living conditions.
Young companies for young renters
Luckily for young renters, new companies are stepping up to help with the housing crisis. Companies like Uplift, Till, Domus, and StayTony were created with a single goal in mind: give young adults access to inaccessible housing.
These specialized lenders bridge the gap between Millennial renters and the increasingly complex housing market. Uplift, for example, offers loans for Millennials at rates they won’t find (or won’t qualify for) anywhere else. The exchange is simple: pay a one-time fee, and Uplift will grant a loan for as low as 15% APR. These loans — a welcome relief for those living paycheck to paycheck — are often enough to finance a security deposit and multiple months of rent payments.
Many of these startups are run by professionals who experienced rent difficulties first-hand. Julien Bonneville, CEO of TheGuarantors, found the inspiration for his company after his repeated frustrations with rentals in the notoriously difficult New York City Market. A then-graduate student at Columbia University, Bonneville’s apartment applications were repeatedly denied. “I applied to 12 apartments, I got rejected from 12 apartments,” Bonneville said in an interview with MarketWatch. From then on, Bonneville made it his mission to help those in similar situations.
Many applying for rentals (especially in major cities) have credit scores and monthly incomes that are good, but not quite good enough. Companies, Iike Bonneville’s, give applications a leg up. As the name suggests, TheGuarantors vouch for applicants who can’t meet the mark. If their clients miss a payment or default on a loan, TheGuarantors are on the financial hook. This extra backing provides the boost struggling and first-time renters need.
Since their 2016 launch, TheGuarantors have assisted thousands of Millennial renters and have secured more than $200 million in leases. TheGuarantors have expanded far beyond their NYC headquarters and have assisted applicants in 40 states.
Benefits and drawbacks
Though they serve Millennial clients, these new specialty lenders also benefit landlords. Renting to twenty and thirty-somethings is a roll of the dice. Will they make their payments on time? Will they make their payments in full? What happens when their paycheck is lower than anticipated? Lending startups ease these worries and provide much-needed financial security.
Renters don’t want to miss payments. Landlord’s don’t want renters to miss them, either. Ultimately, landlords and rental companies don’t really care who the money comes from — they just care that they get it. With big names like Uplift and TheGuarantors on applications, their risk decreases significantly. Yes, the prospective tenant’s financial situation might be a little less than ideal, but landlords know they have a lot less to lose.
These startups are far from perfect, however. Though the low interest rates offered by these startups help to slow the process, these loans burden Millennials with additional debt. In some cases, these looser requirements have proved detrimental to the lending startups themselves. At the end of the day, some clients just can’t pay. Industry leader Domuso has already implemented tighter standards in an attempt to prevent additional loss. Other companies may soon follow suit. Whether successful or unsuccessful, however, lending startups will continue to reshape the world of renting for the foreseeable future.